Money from family, friends or a partner
Take money from people you know without losing the money or the relationship.
5 min read
For most small businesses in India, the first money does not come from a bank. It comes from a parent, a brother-in-law, a friend from college, or a partner who puts in savings alongside you. It is the easiest money to get and the easiest to go wrong — because nobody wants to be the one who asks for it in writing.
Decide what it is, before you take it
The single most important question is one people rarely ask out loud: is this a gift, a loan or a share in the business? Each one means something different when things go well, and very different when they go badly.
| It is… | What they get back | If the business fails |
|---|---|---|
| A gift | Nothing | Nothing is owed |
| A loan | The money back, with or without interest | You still owe it |
| A share | Part of the profits, and a say, for as long as they own it | They lose their money alongside you |
A misunderstanding about which one it was is the commonest way family money ruins a family. One side remembers a gift; the other remembers a loan.
Ask the person directly: "If this business closes in a year, what do you expect to happen to your money?" Their answer tells you which of the three it really is.
If it is a loan
Write down, and both sign:
- the amount, and the date it was given
- whether interest is paid, and how much
- when repayments start, how much each is, and how often
- what happens if a payment is missed
Move the money by bank transfer, not cash, so there is a record on both sides. A short loan agreement is better than nothing; a CA or lawyer can draw one up cheaply and tell you how it should be treated for tax.
If it is a share
Taking money in exchange for part of the business makes that person a partner, and that changes the structure:
- In a proprietorship, there is no such thing as a share. Bringing in an owner means becoming a partnership, an LLP or a company — the choose a structure lesson covers what changes.
- Agree in writing what share they own, how profits are split, who decides what day to day, and what happens if one of you wants out.
- Put it in a partnership deed, an LLP agreement or a shareholders' agreement. Get a professional to draft it.
Do not give away a share of the business when what you need is a loan. A loan ends when it is repaid. A share in the profits lasts for as long as the business does — including the years when it has become worth a lot.
Protect the relationship
- Only take what they can afford to lose. Never a parent's retirement money or a friend's emergency fund. If losing it would change their life, do not take it.
- Tell them the risk honestly. Most new businesses take longer than planned to pay. Say so before they hand the money over, not afterwards.
- Report back. A short update every few months — what is going well, what is not — is far better than silence. Silence makes people assume the worst.
- Treat it like a bank loan. Pay on the dates you agreed. The relationship is why this money was easy to get; paying it back on time is how you keep both.
Combine it with other money
Family money is often most useful as the owner's own contribution to a bank or scheme loan — the part the bank expects you to bring yourself. Used that way, a smaller amount from family unlocks a much larger loan.
If you are weighing up money from people you know against a loan or a scheme, ask the tool below: describe what you need and who has offered, and it will help you work out the arrangement and what to put in writing.